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The New EU Financial Architecture after the
global financial crisis
Prof. Anna Jurkowska-Zeidler
Chair of Financial Law
Faculty of Law and Administration
University of Gdansk
Global Financial Crisis
Experience of the global financial
crisis (2007-2008) has showed
significant weaknesses in
supervision of financial markets,
both in particular cases of banks
and in relation to the financial
market as a whole.
Institutional architecture and
government provision of a financial
safety net for banks and other
financial institutions has been a key
element of the policy response to
the last financial crisis.
The logic inconsistency of the EU financial
market framework
• 1 internal market, 28 Member States, 19 Members of
Euro Zone
A source of:
• Conflicts
• Co-ordination problems
Obstacle to further integration and no optimal model
for financial stability
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The ”Financial trilemma in Europe”
(D. Schoenmaker)
• 3 objectives
– Financial stability
– Integration
– Sovereignty
• Any par of objectives
can be achieved, but
never all three
• The million dollar
question: What’s the
appropriate trade-off?
Financial
stability
Sovereignty
(national
supervision)
Single Market
(Integration)
New financial architecture
Increasing financial integration
• Cross-border capital flows and payments
• Cross-border establishment of banks & financial
institutions – thru group structures
Financial regulation and crisis management have not
kept pace with increasing integration of wholesale
capital markets and growing cross-border operations of
EU financial institutions. How to regulate most efficiently
the cross-dimension of systemic risk?
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Systemic risk on the financial market
• Regulation (EU) No 1092/2010 of the European
Parliament and of the Council of 24/11/2010 on
European Union macro-prudential oversight of the
financial system and establishing a European Systemic
Risk Board (the ‘ESRB Regulation’).
systemic risk means a risk of disruption in the financial
system with the potential to have serious negative
consequences for the internal market and the real
economy. All types of financial intermediaries,
markets and infrastructure may be potentially
systemically important to some degree.
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Financial Safety Net issues
• The financial system is not totally failure-free and is
not designed to be.
• For one, as a general rule, there is a natural limit to
how safe any type of system can be but what makes it
difficult to determine the tolerated risk level is the
complexity of the financial system and the financial
instuments.
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Financial Safety Net issues
• A proper financial safety net is necessary to reduce
the risk of severe financial crises.
• Without an appropriate financial safety net, even
simple rumours of problems regarding solvency or
liquidity of a financial institution have the potential to
become self-fulfilling and turn into a full-blown
financial crisis.
• With an appropriate financial safety net in place,
confidence tends to be greater and the onset of
financial crises less likely than otherwise.
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Financial Safety Net Issues
• There is no generally accepted definition of the key
elements of the financial safety net.
• A narrow definition is limited to deposit insurance
and a lender-of-last-resort function, while a more
widely accepted one includes (at least) three
elements, adding the prudential regulatory and
supervisory framework to the previous components
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Architecture of the Financial Safety Net
Strong & Robust
Banking System
Financial
Stability
Depositor
Protection
Prudential
regulation and
supervision
Lender-of-last resort
facility to assist banks
facing temporary liquidity
problems
Deposit
insurance
system
FINANCIAL SAFETY NET
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Interrelations between elements of
financial safety nets
• The monetary authority, whatever its involvement in
prudential responsibilities (and there is an ongoing
discussion about the extent of that involvement),
plays a crucial role within the financial safety net
because of its role as “lender of last resort”.
• The fiscal authority is involved in the financial safety
net either directly or indirectly because of its role as
“solvency provider of last resort” but also because of
its political responsibility for the use of taxpayer
money
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Lender of Last Resort (LoLR) function
• Liquidity risks are endemic to banks given that these
entities undertake maturity transformation, taking
short-term deposits and investing them in assets that
typically have longer terms to maturity.
• This nature of the banking business implies that banks
may at times be subject to „bank runs” resulting in
their illiquidity, even if they are solvent.
• Through the close credit risk linkages among banks,
the problems at one institution may then spill over to
its peers, perhaps leading to a banking crisis.
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Central Banks in the role LoLR
• The recent financial turbulence has highlighted anew the
importance of liquidity in modern financial markets and
how rapidly it can dry up even in core segments of the
market.
• By providing temporary lending (emergency liquidity
facility) to the market in a time of financial distress, the
central bank can relieve tensions and limit the potential
fears that might prompt bank runs.
• The existence alone of the capacity of the central bank
to act as a LOLR may stabilize expectations without
necessitating any particular course of action.
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The new EU supervisory architecture
• a European
Supervisory Authorites
(ESAs) for the
supervision of
individual financial
institutions ("micro-
prudential
supervision"),
• a European Systemic
Risk Council (ESRC)
which should
monitor and assess
risks to the stability
of the financial
system as a whole
("macro-prudential
supervision").
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The new EU supervisory architecture (ESFS)
European System of Financial Supervision
Macro-prudential supervisionMicro-prudential supervision
ECB (euro area)
National
Supervisors
(non-voting)National
central banks (EU-28)
European
Supervisory
Authoriteis (ESAs)
European
Commission
European Systemic Risk Board
President of the
Economic and
Financial
Committee
(non-voting)
European Banking Authority
European Insurance and Occupational
Pensions Authority
European Central Bank (euro area)
and national supervisory authorities
European Securities
and Markets Authority
Joint Committee of European
SupervisoryAuthorities (ESAs)
European Commission
Bank Deposit Guarantee Scheme
• Whenever a crisis hits, interest in guarantee
arrangements rises.
• A guarantee reduces the threat of bank failures by
raising the likelihood that depositors, which provide a
large part of funding for banks, continue to provide a
stable source of such funds.
• The expansion of guarantees or the introduction of
new ones thus buys time, as it increases the chances
that existing deposits will not be withdrawn. Thus
deposit insurance enhances depositor confidence.
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Federalization of the EU financial market law
The new regulatory and supervisory changes transfer
more powers to the EU and enhance the process
towards the federalization of financial market law.
The new model of EU financial market law is based on
four components:
• the introduction of supervisory bodies at EU level;
• a higher degree of harmonization through the
introduction of a pan-European rulebook;
• greater consistency in the application of EU
regulations;
• the transfer of direct supervisory powers over market
actors to EU regulatory agencies.
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